Executive Compensation Provisions in Dodd-Frank: Part 14

One final suggestion is an alternative to clawbacks, namely, “holdbacks,” which are a pre-payout recovery mechanism. More or less, a holdback approach requires the executive’s incentive compensation award to be mandatorily credited to a deferred compensation account and to be subject to forfeiture/adjustment during a pre-specified vesting period.

If the public company restates its earnings during this period, the portion of the unearned incentive compensation award that is determined to be “unearned” due to the restatement can simply be rendered null and void. Thus, holdbacks are far more efficient, and they are less likely to trigger expensive lawsuits. Holdbacks also give board members a greater way of ensuring that the decisions top executives make support long-term shareholder interests.

Retrospectively, if the SEC would have placed more stringent rules on the financial sector, perhaps, this new Act would not have been necessary. It is critical for the SEC to impose thoughtful, specific, and unambiguous guidance in order to implement the legislative mandate of these provisions in a manner that is feasible and cost-effective for public companies while providing investors with useful and reliable information.